The Case for Remaining a Renter

By Quentin Fottrell

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The combination of super-low house prices and rising rents might raise the appeal of home ownership for some. But economists say there’s a strong case to be made for remaining a renter.

Real estate agent surveys suggest low prices are encouraging first-time homebuyers to take the plunge, the Wall Street Journal reports. Average apartment rents increased 2.7% in 2011 while the national vacancy rate dropped below 5% for the first time since 2001, according to a quarterly survey by real estate firm Reis. But some analysts remain skeptical. For many, they say it may never make sense to buy.

The U.S. government has long encouraged home ownership through tax breaks and other incentives. Prior to the housing bust, this led a generation of young Americans to invest their life savings in property, says Sheldon Garon, a professor of history at Princeton University and author of “Beyond Our Means: Why America Spends While the World Saves.” In other prosperous countries, renting is more often the norm, he says. “Americans should beware of the hype that they’ll get huge tax breaks for owning a home,” he says. Two-thirds of taxpayers don’t itemize deductions on their annual income tax returns “and, thus, benefit in no way from the vaunted mortgage deduction,” he says.

Would-be homeowners also may not want the added expense that comes with maintaining a house. As long as renters avoid real estate brokers – who can charge up to 17% in cities like New York – they only need a damage deposit, says Mark J. Perry, professor of economics at University of Michigan-Flint. Most banks require 10% to 20% of a home price for a down payment, and that doesn’t include legal fees, maintenance and plumbing repairs down the road. “Many people don’t have the credit to buy a house, but do have adequate credit for renting,” Perry says. But Pete D’Arruda, founder and president of Capital Financial Advisory Group in Cary, NC., says low prices are a big incentive for people to build their credit score.

There are, of course, plenty of reasons to want to own real estate. For one, D’Arruda says, mortgage interest is tax deductible. “Turn the tables on banks and lock them into a rate of below 4% for 30 years,” he says. “That’s a great protection against inflation. Does that mean house prices won’t go down again? Probably not, but it’s better to buy a low point.”

However, as the job market shows only tentative signs of recovery, financial advisers say there is still a big need for people to move for work. “Renting helps with that mobility,” says David Abuaf, chief investment officer at Hefty Wealth Partners in Auburn, Ind. “If you own a home, picking up and moving is a much more involved and expensive process.” Corbett says people who need to move because of a new job usually need to do so within 30 days. “Renting gives you that luxury and also protects you from having to sell a home that may not be valued at the price you paid,” he says. With prices still weak, he says homeowners will have to wait a long time for a return on their investment: “Renting will save you from incurring thousands of dollars of closing costs on selling.”

With 30-year mortgages and flat house prices, the accumulation of home equity happens slowly, so the historical advantage of ownership may no longer applies, Perry says. “The S&P 500 is up by about 12% so far this year, offering a much better return than home prices,” he says.